SEC Filing :: STRATTEC Security Corp.

1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 26, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission File Number 0-25150 STRATTEC SECURITY CORPORATION (Exact Name of Registrant as Specified in Its Charter) WISCONSIN 39-1804239 (State of Incorporation) (I.R.S. Employer Identification No.) 3333 WEST GOOD HOPE ROAD, MILWAUKEE, WI 53209 (Address of Principal Executive Offices) (414) 247-3333 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common stock, par value $0.01 per share: 5,456,057 shares outstanding as of September 26, 1999.

2 STRATTEC SECURITY CORPORATION FORM 10-Q September 26, 1999 INDEX Page Part I - FINANCIAL INFORMATION Item 1 Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 7-9 Item 3 Quantitative and Qualitative Disclosures About Market Risk 10 Part II - OTHER INFORMATION Item 1 Legal Proceedings 11 Item 2 Changes in Securities and Use of Proceeds 11 Item 3 Defaults Upon Senior Securities 11 Item 4 Submission of Matters to a Vote of Security Holders 11 Item 5 Other Information 11 Item 6 Exhibits and Reports on Form 8-K 11 2

3 Item 1 Financial Statements STRATTEC SECURITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Amounts) Three Months Ended ------------------ September 26, September 27, 1999 1998 --------------- --------------- (unaudited) Net sales $ 49,667 $ 40,362 Cost of goods sold 38,979 31,527 -------- -------- Gross profit 10,688 8,835 Engineering, selling and administrative expenses 4,888 4,686 -------- -------- Income from operations 5,800 4,149 Interest income 388 244 Other income (expense), net (108) 72 -------- -------- Income before provision for income taxes 6,080 4,465 Provision for income taxes 2,372 1,652 -------- -------- Net income $ 3,708 $ 2,813 ======== ======== Earnings per share: Basic $ .67 $ .49 ======== ======== Diluted $ .65 $ .48 ======== ======== The accompanying notes are an integral part of these consolidated statements. 3

4 STRATTEC SECURITY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) September 26, June 27, 1999 1999 --------------- ----------- ASSETS (unaudited) Current Assets: Cash and cash equivalents $ 25,927 $ 28,611 Receivables, net 31,524 36,063 Inventories- Finished products 3,870 4,439 Work in process 13,445 11,145 Raw materials 924 774 LIFO adjustment (2,559) (2,554) --------- ---------- Total inventories 15,680 13,804 Customer tooling in progress 3,852 3,758 Other current assets 5,170 5,047 --------- ---------- Total current assets 82,153 87,283 Property, plant and equipment 83,299 81,519 Less: accumulated depreciation 42,395 40,608 --------- ---------- Net property, plant and equipment 40,904 40,911 --------- ---------- $ 123,057 $ 128,194 ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 15,026 $ 17,386 Environmental 2,816 2,820 Other accrued liabilities 9,926 12,216 --------- ---------- Total current liabilities 27,768 32,422 Deferred Income Taxes 512 512 Accrued pension and postretirement obligations 12,715 12,915 Shareholders' equity: Common stock, authorized 12,000,000 shares $.01 par value, issued 5,974,028 shares at September 26, 1999, and 5,945,298 shares at June 27, 1999 60 59 Capital in excess of par value 44,687 43,999 Retained earnings 53,159 49,451 Cumulative translation adjustments (1,997) (2,081) Less: treasury stock, at cost (517,971 shares at September 26, 1999 and 378,788 shares at (13,847) (9,083) June 27, 1999) --------- ---------- Total shareholders' equity 82,062 82,345 --------- ---------- $ 123,057 $ 128,194 ========= ========== The accompanying notes are an integral part of these consolidated balance sheets. 4

5 STRATTEC SECURITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Three Months Ended ------------------- September 26, September 27, 1999 1998 --------------- ---------------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,708 $ 2,813 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,843 1,728 Change in operating assets and liabilities: (Increase) decrease in receivables 4,553 (3,866) Increase in inventories (1,876) (46) Increase in other assets (201) (638) Increase (decrease)in accounts payable and accrued liabilities (4,887) 63 Other, net 59 (27) -------- -------- Net cash provided by operating activities 3,199 27 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (1,807) (1,000) -------- -------- Net cash used in investing activities (1,807) (1,000) CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock (4,778) (3,230) Exercise of stock options 702 78 -------- -------- Net cash used in financing activities (4,076) (3,152) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (2,684) (4,125) CASH AND CASH EQUIVALENTS Beginning of period 28,611 14,754 -------- -------- End of period $ 25,927 $ 10,629 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income taxes paid $ 386 $ 195 Interest paid - - The accompanying notes are an integral part of these consolidated statements. 5

6 STRATTEC SECURITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASIS OF FINANCIAL STATEMENTS STRATTEC SECURITY CORPORATION (the "Company") designs, develops, manufactures and markets mechanical locks, electro-mechanical locks and related security products for major automotive manufacturers. The accompanying financial statements reflect the consolidated results of the Company, its wholly owned Mexican subsidiary, and its foreign sales corporation. In the opinion of management, the accompanying unaudited financial statements contain all adjustments which are of a normal recurring nature, necessary to present fairly the financial position as of September 26, 1999, and the results of operations and cash flows for the period then ended. All significant intercompany transactions have been eliminated. Interim financial results are not necessarily indicative of operating results for an entire year. Certain amounts previously reported have been reclassified to conform to the September 26, 1999 presentation. EARNINGS PER SHARE (EPS) A reconciliation of the components of the basic and diluted per-share computations follows (in thousands, except per share amounts): Three Months Ended ------------------ September 26, 1999 September 27, 1998 ------------------ ------------------ Net Per-Share Net Per-Share Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ -------- Basic Earnings Per Share $3,708 5,511 $0.67 $2,813 5,701 $0.49 ===== ===== Stock Options 160 159 ----- ----- Diluted Earnings Per Share $3,708 5,671 $0.65 $2,813 5,860 $0.48 ===== ===== ===== ===== Options to purchase the following shares of common stock were outstanding as of each date indicated but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares: Exercise Shares Price ------ ------ September 26, 1999 80,000 $45.79 78,623 $37.88 5,000 $35.97 September 27, 1998 80,000 $37.88 80,000 $31.98 5,000 $31.63 COMPREHENSIVE INCOME The following table presents the Company's comprehensive income (in thousands): Three Months Ended ------------------ September 26, 1999 September 27, 1998 ------------------ ------------------ Net Income $3,708 $2,813 Change in Cumulative Translation Adjustments, net 84 - ------ ------ Total Comprehensive Income $3,792 $2,813 ====== ====== 6

7 Item 2 STRATTEC SECURITY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following Management's Discussion and Analysis should be read in conjunction with the Company's accompanying Financial Statements and Notes thereto and the Company's 1999 Annual Report. Unless otherwise indicated, all references to years refer to fiscal years. Analysis of Results of Operations Three months ended September 26, 1999 compared to the three months ended September 27, 1998 Net sales for the three months ended September 26, 1999 were $49.7 million, a increase of 23 percent compared to net sales of $40.4 million for the three months ended September 27, 1998. Sales to the Company's largest customers increased in the current quarter compared to the prior year quarter, with General Motors and Delphi Automotive Systems Corporation increasing 42 percent, DaimlerChrysler Corporation increasing 18 percent and Ford Motor Company increasing 6 percent. This sales growth was primarily due to a combination of higher value mechanical and electro-mechanical content and increased production volumes at these customers. In addition, labor disruptions at General Motors Corporation during July 1998 reduced sales to this customer by an estimated $4.4 million during the prior year quarter. Gross profit as a percentage of net sales was 21.5 percent in the current quarter compared to 21.9 percent in the prior year quarter. The lower gross margin is the result of several factors including higher production start-up costs relating to the launch of the new model year 2000 vehicles, plant rearrangement costs associated with the Milwaukee facility, and product mix. In addition, the gross margin was negatively impacted as inflationary cost pressures in Mexico over the last 12 months have resulted in higher U.S. dollar costs. The inflation rate in Mexico for the 12 months ended September 1999 was approximately 16 percent while the U.S. dollar/Mexican peso exchange rate fell to approximately 9.35 in the current year quarter from approximately 9.50 in the prior year quarter. The negative impact of these factors was partially offset by a decrease in the cost of zinc, which the Company uses at a rate of approximately 1 million pounds per month. The cost of zinc per pound averaged approximately $.52 in the current quarter compared to approximately $.61 in the prior year quarter. Engineering, selling and administrative expenses were $4.9 million in the current quarter which is consistent with the prior year quarter. Income from operations was $5.8 million in the current quarter, compared to $4.2 million in the prior year quarter. The increased income from operations was primarily due to the increase in sales as previously discussed above. The effective income tax rate for the current quarter was 39 percent compared to 37 percent in the prior year quarter. The increase is due to an increase in the federal statutory tax rate resulting from higher net income levels as well as an increase in the state effective tax rate. The overall effective rate differs from the federal statutory tax rate primarily due to the effects of state income taxes. Liquidity and Capital Resources The Company generated cash from operating activities of $3.2 million in the three months ended September 26, 1999. In the three months ended September 27, 1998, the Company generated $27,000 in cash from operating activities. The increased generation of cash is primarily due to the reduction in sales to General Motors during June 1998 and July 1998 as a result of previously discussed labor disruptions at this customer. 7

8 The Company's investment in accounts receivable decreased by approximately $4.5 million to $31.5 million at September 26, 1999, as compared to $36.1 million at June 27, 1999, primarily due to a decrease in outstanding billings for customer tooling. Inventories increased by approximately $1.9 million at September 26, 1999, as compared to June 27, 1999 in support of increased sales levels. Capital expenditures during the three months ended September 26, 1999 were $1.8 million compared to $1.0 million during the three months ended September 27, 1998. The Company anticipates that capital expenditures will be approximately $9 million to $10 million in 2000, primarily in support of requirements for new product programs and the upgrade and replacement of existing equipment. The Board of Directors of the Company has authorized a stock repurchase program to buy back up to 889,395 outstanding shares. A total of 673,000 shares have been repurchased as of September 30, 1999, at a cost of approximately $19.1 million. Additional repurchases may occur from time to time. Funding for the repurchases was provided by cash flow from operations and borrowings under existing credit facilities. In October 1999, the Board of Directors of the Company authorized the repurchase of an additional 500,000 outstanding shares bringing the total number of authorized shares in the repurchase program to 1,389,395. The Company has a $25 million unsecured, revolving credit facility (the "Credit Facility") which expires October 2001. There were no outstanding borrowings under the Credit Facility at September 26, 1999. Interest on borrowings under the Credit Facility are at varying rates based, at the Company's option, on the London Interbank Offering Rate, the Federal Funds Rate, or the bank's prime rate. The credit facility contains various restrictive covenants including covenants that require the Company to maintain minimum levels for certain financial ratios such as tangible net worth, ratio of indebtedness to tangible net worth and fixed charge coverage. The Company believes that the Credit Facility will be adequate, along with cash flow from operations, to meet its anticipated capital expenditure, working capital and operating expenditure requirements. The Company has not been significantly impacted by inflationary pressures over the last several years, except for zinc and Mexican assembly operations as noted elsewhere in this Management's Discussion and Analysis. Year 2000 Compliance The Company's Year 2000 readiness project has been ongoing since late 1997. The plan addresses operating systems, the manufacturing operations, customers and suppliers. The Company's operating systems have been fully updated to Year 2000 compliant versions. The Year 2000 compliant versions are currently in use throughout the Company. Tests have been performed in which transaction dates were set forward past January 1, 2000. These test transactions were accurately processed. The Company plans to continue testing and retesting throughout the remainder of the calendar year. Verification that all equipment used in the manufacturing operations is Year 2000 compliant has been completed. A Year 2000 readiness questionnaire has been distributed to all suppliers and a risk analysis has been prepared for each supplier based on the completed questionnaires. On-site assessments have been and continue to be performed for all high-risk suppliers. Based on the results of on-site assessments, alternate sources will be identified as necessary. The Company is instituting contingency planning. The Company will limit vacations during late 1999 and early 2000, and the information systems department will be staffed over the millennium weekend. A chain of command is being established to respond to unforeseen events and to ensure that personnel will be available to handle issues that may arise. Despite the Company's efforts, there is no guarantee or assurance that all Year 2000 problems will be uncovered. The Company is participating in a program coordinated by the Automotive Industries Action Group ("AIAG"), a group sponsored by General Motors Corporation, DaimlerChrysler Corporation and the Ford Motor Company. Based upon the guidelines of a Year 2000 Readiness Self-Assessment developed by the AIAG, the Company is classified as a low risk supplier in relation to Year 2000 compliance. 8

9 The Company implemented a new business information system in February 1997. No significant modifications to the software to be compliant with the requirements to process transactions in the Year 2000 were required. Therefore, the Company's cost to become Year 2000 compliant was not material to its financial condition or results of operations. Mexican Operations The Company has assembly operations in Juarez, Mexico. Since December 28, 1998, and prior to December 30, 1996, the functional currency of the Mexican operation has been the Mexican peso. The effects of currency fluctuations result in adjustments to the U.S. dollar value of the Company's net assets and to the equity accounts in accordance with Statement of Financial Accounting Standard (SFAS) No. 52, "Foreign Currency Translation." During the period December 30, 1996, to December 27, 1998, the functional currency of the Mexican Operation was the U.S. dollar, as Mexico was then considered to be a highly inflationary economy in accordance with SFAS No. 52. The effect of currency fluctuations in the remeasurement process was included in the determination of income. The effect of the December 28, 1998, functional currency change was not material to the financial results of the Company. Other On October 19, 1999, the Company announced that it had signed a Memorandum of Understanding with E. Witte Verwaltungsgesellschaft MBH, and its operating unit, Witte-Velbert GmbH & Co. KG, which details the intent to form a strategic alliance and joint venture. Witte, of Velbert, Germany, is a privately held, QS 9000 and VDA 6.1 certified automotive supplier with sales of over DM300 million in their last fiscal year. Witte designs, manufactures and markets components including locks and keys, hood latches, rear compartment latches, seat back latches, door handles and specialty fasteners. Witte's primary market for these products has been Europe. The proposed Witte-STRATTEC alliance provides for the manufacture, distribution and sale of Witte products by the Company in North America, and the manufacture, distribution and sale of the Company's products by Witte in Europe. Additionally, a joint venture company in which each company holds a 50 percent interest will immediately be established to seek opportunities to manufacture and sell both companies' products in other areas of the world. Forward Looking Statements A number of the matters and subject areas discussed in this Form 10-Q that are not historical or current facts deal with potential future circumstances and developments. These include expected future financial results, product offerings, global expansion, liquidity needs, financing ability, planned capital expenditures, management's or the Company's expectations and beliefs, and similar matters discussed in the Company's Management Discussion and Analysis of Results of Operations and Financial Condition. The discussions of such matters and subject areas are qualified by the inherent risk and uncertainties surrounding future expectations generally, and also may materially differ from the Company's actual future experience. The Company's business, operations and financial performance are subject to certain risks and uncertainties which could result in material differences in actual results from the Company's current expectations. These risks and uncertainties include, but are not limited to, general economic conditions, in particular, relating to the automotive industry, consumer demand for the Company's and its customers products, competitive and technological developments, foreign currency fluctuations, Year 2000 compliance issues and costs of operations. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. 9

10 Item 3 Quantitative and Qualitative Disclosures About Market Risk The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which would expose the Company to significant market risk. The Company has not had outstanding borrowings since December 1997. The Company has been in an investment position since this time and expects to remain in an investment position for the foreseeable future. There is therefore no significant exposure to market risk for changes in interest rates. The Company is subject to foreign currency exchange rate exposure related to the Mexican assembly operations. 10

11 Part II Other Information Item 1 Legal Proceedings - None Item 2 Changes in Securities and Use of Proceeds - None Item 3 Defaults Upon Senior Securities - None Item 4 Submission of Matters to a Vote of Security Holders - None Item 5 Other Information - None Item 6 Exhibits and Reports on Form 8-K (a) Exhibits 3.1* Amended and Restated Articles of Incorporation of the Company 3.2* By-Laws of the Company 4.1* Rights Agreement dated as of February 6, 1995 between the Company and Firstar Trust Company, as Rights Agent 27 Financial Data Schedule (b) Reports on Form 8-K - None - -------------------------------- * Incorporated by reference to Amendment No. 2 to the Company's Form 10 filed on February 6, 1995. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STRATTEC SECURITY CORPORATION (Registrant) Date: November 8, 1999 By /S/ Patrick J. Hansen ---------------------- Patrick J. Hansen Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Accounting and Financial Officer) 11

5 1,000 3-MOS JUL-02-2000 JUN-28-1999 SEP-26-1999 25,927 0 31,774 250 15,680 82,153 83,299 42,395 123,057 27,768 0 0 0 60 82,002 123,057 49,667 49,667 38,979 38,979 0 0 0 6,080 2,372 3,708 0 0 0 3,708 .67 .65